Passive Investing Still Requires Active Thinking

Written by David L. Blain, CFA — CEO, BlueSky Wealth Advisors

Passive investing has been one of the best developments for investors over the last several decades. Low cost ETFs have made it easier to build diversified portfolios, avoid unnecessary trading, reduce expenses, and stay invested through good markets and bad ones. That is a good thing, and nothing in this note should be read as an argument for active trading, market timing, or jumping in and out of funds based on headlines. Most investors hurt themselves doing that.

But somewhere along the way, a lot of people took a reasonable idea and stretched it too far. They started to believe that passive investing means you can buy an ETF, forget about it, and assume the index provider is doing something neutral, obvious, and permanent in the background. Unfortunately, that is not quite right.

An index is a set of choices, not a neutral default

An index is not handed down from the mountain, like Moses and the Ten Commandments. Someone creates it, writes the rules, and decides which companies qualify, which countries qualify, how much weight each security gets, and when changes are made. Those decisions may be rules based, transparent, and disciplined, but they are still decisions. No one really owns “the market.” They own a particular version of the market, designed by a particular index provider, using a particular methodology.  

When does your ETF actually own a new company?

SpaceX is a good example. If SpaceX becomes public, investors may naturally assume that any broad U.S. stock ETF will eventually own it at roughly the same time. That is not necessarily true. S&P has not changed the S&P 500 rules to fast track a newly public company like SpaceX into the index, so funds that track the S&P 500, such as SPY, IVV, and VOO, would not be expected to own it immediately. Other index families may handle it differently, especially if their rules allow faster inclusion of very large newly public companies. 

That does not mean one index provider is right and another is wrong. It means the methodology matters. The same company can enter different indexes at different times, in different weights, and with different float adjustments. A passive investor may end up with exposure sooner or later depending not on an investment decision they made directly, but on the rules of the index their ETF happens to track.  

What “emerging markets” actually means today

Emerging markets are another good example. Many investors still think of emerging markets in the old BRIC framework: Brazil, Russia, India, China, plus commodities, demographics, a rising middle class, and the next billion consumers. That is still part of the broad opportunity set, except Russia is essentially gone from world markets, but it is not what the standard emerging markets index looks like today. 

The MSCI Emerging Markets Index is now heavily concentrated. At the time of this writing (June, 2026), Taiwan Semiconductor, TSMC, is about 14.5% of the index by itself. The top 10 holdings are about 39%. Information Technology is over 43%. Taiwan and South Korea together are roughly half the index. China is still meaningful, but it is no longer the whole story. India and Brazil are much smaller pieces than many investors probably assume. 

So when someone says, “I own emerging markets,” what do they actually own? They may think they own a broad basket of developing economies. In reality, they may own a very large position in Taiwan, South Korea, semiconductors, the AI supply chain, and China, with smaller allocations to India, Brazil, commodities, and frontier market demographics. That may be fine. It may even be attractive. But it is not the same exposure most people probably have in mind when they hear the phrase “emerging markets.”  

Buying ETFs is easy. Building a portfolio isn’t.

This is where the do-it-yourself passive investing conversation gets more complicated. Buying low cost ETFs is not hard. Building a coherent portfolio is harder. Understanding the differences between index providers is harder. Knowing when a fund has drifted away from the role you expected it to play is harder. Knowing whether concentration is acceptable, accidental, or excessive is harder. And knowing what to do about it without turning into a short term trader is harder still. 

The danger is not passive investing. The danger is passive thinking.

Questions worth asking about every fund you own: 

A good investment process still asks basic questions:

• What is this fund supposed to do in my portfolio? 
• What index does it track? 
• How is that index built? 
• What are the top holdings? 
• What are the country and sector exposures? 
• Has the fund become more concentrated over time? 
• Does it still match the reason we bought it in the first place? 

Those questions do not require panic, but they do require attention. The right answer is not to abandon ETFs or try to outguess the market every quarter. For most investors, that would be a mistake. The better answer is to respect the fact that even a passive portfolio needs ongoing oversight, not because we are trying to predict the next market move, but because we need to make sure the portfolio still owns what we think it owns.  

A tool, not a replacement for judgment

Passive investing can be a very good tool. But like any tool, it can be misused. The ETF label does not remove the need for judgment. The index name does not tell the whole story. And “buy and hold” should not mean “buy and stop paying attention.” 

The more successful passive investing becomes, the more important this becomes. Trillions of dollars now follow indexes. Index methodology decisions can shape real capital flows. Inclusion dates, eligibility rules, float adjustments, country classifications, and sector weights all matter. None of this means investors need to trade more, but it does mean they need to understand more. 

Do you know what you own? 

If you’re not sure, let’s take a look together.